Regulators aim to curb speculators' influence on oil prices

The Commodity Futures Trading Commission on Tuesday will announce that it'll begin publishing how much hedge funds and other big financial firms are trading in oil and other commodities, with an eye toward curbing what critics say is speculation that pushes prices up.

A year ago, south-central Kansas was bustling with oil rigs and pumps as world oil prices soared. This pump was at work in an oil field in Kingman County.
Travis Heying / Kansas City Star

WASHINGTON — The Commodity Futures Trading Commission on Tuesday will announce that it'll begin publishing how much hedge funds and other big financial firms are trading in oil and other commodities, with an eye toward curbing what critics say is speculation that pushes prices up.

The CFTC currently publishes weekly data that lumps some of the big financial firms' transactions in with those done by so-called commercial users — airlines, refiners and others who actually use the oil. Critics argue that leaves regulators and the public unaware of how much oil prices are being influenced by speculation.

"Enhancing the quality of information in these weekly reports will better inform market participants and the public about the positions of the various types of traders," CFTC Chairman Gary Gensler said in a statement that was to be made public early Tuesday.

Since oil prices hit their all-time record of $147 a barrel a year ago, there's been growing pressure on regulators to curb excessive speculation in energy trading, and commodities markets more generally. The issue resurfaced in recent months as oil prices climbed from $40 to $70 with little obvious change in oil consumption patterns.

"I'm glad that the CFTC really, for the first time I can remember, is focused on excessive speculation rather than just manipulation in the energy markets. I think that's key because excessive speculation is a different concept," said Michael Masters, a hedge fund manager who's testified before Congress on how speculators are influencing oil prices. "It's the idea that speculators can set the price of commodities once they've become a dominant force in the commodities market. That's different from . . . a small group (of traders) engaged in some form of a nefarious scheme."

As a Treasury undersecretary in the final days of the Clinton administration, Gensler was involved in the deregulation of commodities trading that critics think contributed to today's global financial crisis. As the new CFTC chairman, Gensler is making amends by holding planned hearings and winning praise from colleagues.

"In the past couple of years the U.S. taxpayer has taken a kick in the teeth on prices they pay for a loaf of bread, a gallon of gas, even the palladium that goes in the catalytic converter in your car — and it's the responsibility of the CFTC to ensure, not high or low prices, but fair prices," said Bart Chilton, a CFTC commissioner, in a statement to McClatchy.

"I think that the CFTC has not done enough to ensure that speculative limits or levels were enforced aggressively and that exemptions from these important regulations were granted appropriately. And, I believe that American consumer paid the price . . . for that lack of diligence."

The exemptions he referred to involve big Wall Street firms such as Goldman Sachs, Morgan Stanley and others, which have been exempted from limits on how much they can trade.

These financial players are treated as commercial players although they've never taken possession of the product. That allows them to hedge bets they've made in the unregulated swaps market, where private bets between two parties take place outside a regulated exchange.

The size of these swaps markets dwarfs the regulated futures market, where traders collectively determine the price of oil by trading contracts for future delivery.

Critics of the current system think that excessive speculative money in both the swaps markets and on futures exchanges is driving up oil prices.

Also driving up prices, the critics say, is the practice by pension funds and big university endowments to invest in commodity indexes, a practice called index investment.

These investors buy a range of commodities, including oil, and then hold the contract as if it were stock in a company whose share price will rise over time. Masters and other experts think the practice distorts the process of a buyer and seller discovering the real market price of a product by supply and demand. Under the new regulations, index investments also will be publicized.

Critics of the current system hope the greater transparency in commodities trading will evolve into the kind of disclosures found in equity markets, with big investors making public how much stock they own in particular companies.